Whether You 990 or Not, Changes ARE Coming

1. Whether You 990 or Not,Changes ARE Coming Barbara Clemenson, CPA, CFRE

2. Outline • Causes of Increased Scrutiny • Pressures for Increased Scrutiny • Results of Increased Scrutiny • Recommendations for Meeting the Pressures of Increased Scrutiny

3. Causes of Increased Scrutiny • Notorious Corruption Cases: Business, Government and Nonprofit • General Atmosphere of Skepticism and Economic Pressure

4. Causes of Increased Scrutiny Notorious Corruption Cases: Business, Government and Nonprofit

5. Causes of Increased Scrutiny General Atmosphere of Skepticism and Economic Pressure Skepticism • Nonprofit Hospitals • Executive Compensation • Gifts in Kind • Family/Friends Relationships

6. Causes of Increased Scrutiny General Atmosphere of Skepticism and Economic Pressure Economic Pressure • As resources become more stretched and restricted • Scrutiny to reduce spending, and pressure to increase revenue, intensifies.

7. Pressures for Increased Scrutiny • Regulation in the For Profit Sector: Sarbanes-Oxley, 2002 • General Methods of Government Intervention in the Nonprofit Sector: Federal and State Levels • Self-Regulation • Lobbying

8. Pressures for Increased Scrutiny Regulation in the For Profit Sector: Sarbanes-Oxley, 2002 If we do not regulate ourselves, we WILL be regulated by others!

9. Pressures for Increased Scrutiny • Governmental Pay-Go Rules: If new legislation is introduced that will increase the federal budget, it must pay for itself through: • Increased taxes • Reducing other budget items • Closing tax loopholes

10. Pressures for Increased Scrutiny • The Senate Finance Committee believes there is $1.8 billion being lost annually through fraudulent or inappropriate donor reporting. • Senator Grassley (R), former Chair, was pushing for nonprofit Sarbanes-Oxley type legislation .. But then, Hurricane Katrina happened.

11. Pressures for Increased Scrutiny • New Approach = Piecemeal legislation  Tacking nonprofit regulation on to other laws, tackling “abuses” one at a time. • American Jobs Creation Act of 2004 (auto donation regulation) • Pension Protection Act of 2006 (August 2006)

12. Pressures for Increased Scrutiny Pension Protection Act • Recordkeeping for monetary donations • Donated clothing and household items: Good condition; Appraisals for items worth more than $500 • Small charities, under $25,000, need to annually electronically file notice • Reporting payments by controlled organizations • Tax-free donations from IRAs by taxpayers 70 ½ + up to $100,000 for 2006 and 2007.

13. Pressures for Increased Scrutiny Current Government Intervention Areas of Interest: • Donor advised funds and supporting organizations • Technical corrections bill on the Pension Protection Act -- • General sessions in the House Ways and Means Committee this summer on the nonprofit sector

14. Pressures for Increased Scrutiny General Methods of Government Intervention: • IRS in February 2007 published a draft of Good Governance Practices for Nonprofit Organizations http://www.irs.gov/pub/irs-tege/good_governance_practices.pdf

15. Pressures for Increased Scrutiny General Methods of Government Intervention: • IRS Good Governance • This has NOTHING directly related to do with finances. The IRS’ rationale is that NPOs with good governance will be more likely to act responsibly. • Scope expansion!

16. Pressures for Increased Scrutiny General Methods of Government Intervention: • IRS Good Governance • The IRS will monitor other self-regulation proposals, looking for an emergence of good practices. • Might those practices be legislated in the future?

17. Pressures for Increased Scrutiny General Methods of Government Intervention: State Levels • States increasing reporting and regulation of the NPOs • States passing Sarbanes-Oxley type laws: CA was the first

18. Pressures for Increased Scrutiny Self-Regulation • Independent Sector: Panel’s Advisory Committee on Self Regulation Draft Principles • http://www.nonprofitpanel.org/selfreg/index.html

19. Pressures for Increased Scrutiny Self-Regulation Independent Sector Draft Principles cover: • Facilitating Legal Compliance • Effective Governance • Strong Financial Oversight • Responsible Fundraising

20. Pressures for Increased Scrutiny Lobbying • Alliance for Charitable Reform, a project of The Philanthropy Roundtable. • http://www.acreform.com/

21. Results of Increased Scrutiny • Revised 990 • Increased Oversight of New Nonprofits • Pressure for Disclosure

22. Results of Increased Scrutiny Revised 990 • Increased scrutiny of donor advised funds: • Line 1a • Line 22a

23. Results of Increased Scrutiny Revised 990 • Increased scrutiny of compensation and related party transactions • Lines 23 and 24 • Lines 25a, b and c  Schedule A Part 1. • Lines 50 a and b • Line 63 • Part V-A, V-B

24. Results of Increased Scrutiny Revised 990 • Increased scrutiny of compensation and related party transactions • Part XI • Schedule A Part VII: Relationships to other NPOs

25. Results of Increased Scrutiny Increased Oversight of New Nonprofits • Seeds of Grace, Mission • Postcard Annual Registration for small NPOs (under $25,000)

26. Results of Increased Scrutiny Pressure for Disclosure IRS forced disclosure on 990  Expected public information for funders and media  Best practices

27. Recommendations • Governance • Finances • Employment • Relationships

28. Recommendations Governance • Widen your community representation. • Conduct a board assessment to determine strengths and skill needs of your present Board. • Perhaps use the resources of a third party to find new Board members. [We tend to recruit people we know, who are like us.]

29. Recommendations Governance • Widen your community representation. The IRS is looking boards reflecting broad public interests, rather than the interests of a small group of donors or related parties. Specifically they are reviewing boards for the inclusion of: • Public officials • Individuals with expertise in organization’s area of operations • Leaders from the local community • Representatives of the constituency the organization serves • Others representing a broad cross-section of community interests.

30. Recommendations Finances • Honestly report, understand and explain your finances. • “Acceptable percentages” • CFO Cover Story, Misgivings http://www.cfo.com/article.cfm/8477078?f=search Both of these resources are in the convention notebook.

31. Recommendations Employment • Make sure you are following all federal, state and local labor laws.

32. Recommendations Employment • Are you paying a living wage?

33. Recommendations Relationships • Move towards NOT having people from the same family working at the Mission or on the Board. • Move away from doing business with related parties. It’s not illegal right now, as long as those transactions are disclosed, but that is an area where it might well become prohibited in the future.

34. Recommendations Relationships • Advantages: • Looks better in the eyes of the community • By having family and friends out in the community working at other organizations, you extend the outreach of and connections with the Mission.

35. Resources: www.irs.gov

36. Resources: www.irs.gov

37. Conclusion • Man looks at the outward appearance, but the LORD looks at the heart. I Samuel 16:7 • Man DOES look at the outward appearance! • We are taking pains to do what is right, not only in the eyes of the Lord but also in the eyes of men. II Corinthians 8:21 • We might be within our legal rights, and still be doing things that don’t pass the “smell” test in the eyes of our community.